What are Fixed Assets

Welcome Friends, you are welcome to learnvern. I am Anshu Sachan.

In the last session we saw, what the importance of the bookkeeping process is. In today’s session, we will be learning about fixed assets, as what are fixed assets and why we should know about them.

Fixed assets are an important part of my business. Imagine you are doing a business, and depending on the size of your business you need to have the fixed assets accordingly. But what does fixed assets mean? If we go with the proper definition, then the kinds of assets, then you will be using multiple times. Meaning when you would be purchasing it, then at that time your intention would be seen. As to what is your intention towards the asset. Suppose that I am running a business, and I am purchasing a computer, it's not my intention as I will purchase a computer today and then I will be selling it the next day. It's not an intention, or a decision. My true intention is to purchase the computer, so that, in my main business, it would be useful. Think like I am a retailer of the garments. I buy the garments in wholesale and then sell it to customers. So you can understand from this, that it's not like that I will buy a computer and then I will resell it later. Getting me? Why am I buying the computer? So that I can book my day to day transactions in it, and also can book my inventory. If I want to print any invoice then I would be able to print the invoice. Understanding me? Whenever we do any purchase, the international of the purchaser is seen. As to what the intention of the purchaser is.

Does he want to purchase it and then sell it. Then it would not be a fixed asset. It would be your inventory, or your current asset. Now, how would you know that in any business whether this would go in inventory or in fixed assets. Only one thing would tell you about this, as how it is being used. Okay?

Now in assets there are two different kinds of assets. One is current assets and the other one is fixed assets. YOu can see from the chart as the fixed asset is tangible and intangible. But what about the current asset. What is the difference between the current asset and fixed assets? Let's first talk about current assets. As the name suggests it is current. Meaning, quick, or easily, it can be easily converted into money. Now for the examples of the current asset, it can be stock or inventory. Imagine you have some stock or inventory with you and you are not able to sell it, so what you can do is. You can sell it for a lower price. That means it can be easily converted to money. Got it? This is called current assets. Like, trade debtors, meaning the individuals from whom you need to take the money from. So if I tell my trade debtors as I am giving you a discount of 10 percent then everyone would start giving me the payment. Understood? IF there is a situation, in which I have to sell my asset then how would the realisation of the assets be? Meaning, how easily can I convert it to cash or bank? The liquidity of the asset, based on that, the asset is decided if it is current or fixed. Understood?

Now let’s talk about cash in the bank, I have the money in my hand. It is my current asset. I do not have to realise it. I do not have to put in any effort as I have to sell it. Okay? You might have heard about fixed deposits. There are fixed deposits of 30 days or 90 days. A fixed deposit of less duration can easily be broken and converted to cash. Then the next one is called short term investment. Which investment? Short term investment, your intention was to sell it and then make money out of it. You did not have a long term view for it. Your view was to purchase it and then sell it later. So this was your short term investment. Now, what were the examples of the current assets? One is your inventory, then the next one is your cash and bank, then there are short term investments. The FD and the treasury bills that you would be able to recover in 90 days. Meaning the value of it will be realised in 90 days, that means that it will be realised in 90 days. Okay? So this was your current assets. You can quickly convert it to cash. Then the second position is of the fixed assets. Fixed assets meaning, that you have purchased the assets, for using it in the business. With the help of that asset your business would be running smoothly. It would be used in your business . You would be able to do your business in a more effective way. Understanding me? Fixed assets mean, you are not looking to realise it in one year. You are not thinking as I have purchased it today and I will be selling it tomorrow. Or I might sell it in 30 days or 90 days. Your view is for the long term investment. YOu are investing one time in it but its benefits would be taken for 1 or more than 1 year. Understanding me? What your international is, what you want to take from those assets, how would you utilise it. It will all depend on, whatever thing that you have purchased, whether it will go in fixed assets or current assets. SUppose we bought a motor vehicle, like I have bought a car. Why did I buy a car? I bought it for business purposes. As I have some logistics work. The trade that I do, I have to move it from one place to another. For that Logistic work I have purchased a van.

Now what is my intention here? It's not my intention that I bought the van today and I will sell it tomorrow. My intention is to make the transport easier and my products to be delivered quicker and my customers to get their product faster. For that reason I have purchased that van. Now my intention is known, as my intention is not to sell it but to use it for a long term, for maybe 4 years or 5 years or maybe 6 or 10, or until the van keeps on running. I want to keep utilising it. So, this van will go in the fixed assets.

Now the fixed assets are divided into two types. The first one is tangible asset and the second one is intangible asset. Look, assets have two parts, fixed assets and current assets. Here, what I am explaining are the two parts of the fixed assets. That is tangible assets and intangible assets. Now what is the meaning of tangible assets?

Understand the word tangible. The things that you can touch are called tangible assets. Like the plant and machinery, you can see it, you can touch it. Then the motor vehicle, car, computer. All of these are tangible assets. Okay? Now coming to the intangible. Goodwill, patents, software, are all your intangible assets.

Look as you keep on utilising your fixed assets in your business, the wear and tear of the item will occur. As you continue to constantly use the assets, its market value will start to decrease. Understanding me? As I have purchased a van today, then the value of it is 10 lac today, then after 2 years the value of it would not be 10 lac rupees it would be 6 lac or 7 lac. I would depend on the market situation.

So, as we have utilised it, as we have used it. According to that, what you have to do is, you need to adjust the wear and tear, you need to calculate the depreciation for it. Understood? Now there are different depreciation policies. Like the straight line method, then the written down method. We will be learning about them in the upcoming lectures, such as what is a straight line method and which method is called a written down method. Okay. As to how the fixed asset would be depreciated. So, the books of account that I have, the balance sheet that I have would show us the current position. Suppose if you are not calculating the depreciation. Then in the first year you showed the asset to be 10 lac, then in the second year the asset would be 10 lac, then in the third year also it would be 10 lacs. Why? Because you are not depreciating the assets. So even after 3 years, what am I showing in the books of account? That my asset is worth 10 lac. Whereas the market value of the asset has reached 6 or 7 lacs. Okay? Meaning its wear and tear have happened and its depreciation have occurred.

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Your balance sheet after 3 years will show the correct position, Only when you will provide its depreciation properly. Ok?

Ahead, We will decide how to calculate depreciation.

Who will decide which policy to use?

Management or the business owner himself.

According to the use of assets and its depreciation.

Expected life is also to be taken into consideration.

We will see “expected life” at the time of learning depreciation.

How many years do you think this van will work?

6 years ?

8 years?

Obviously assumption is done according to the use.

Expected life of this van can be decided according to the use of it in the business.

Can we standardise?

No we cannot.

Suppose you have less use of the transportation in your business.

Hardly 3-4 deliveries in one month.

And your second business might have 4 rounds per day.

4 rounds for exchanging the goods in a day !

Getting me?

So we cannot standardise.

Every business knows how to utilise its own fixed assets in the business.

So accordingly the depreciation policy is decided. Ok?

We will see depreciation policies ahead.

Before that let’s talk about assets.

We can see an excel file on the screen.

Where I have bifurcated tangible assets and intangible assets.

As I told you, tangible assets can be touched.

Like you can touch plants and machinery.

Motor vehicle.

 Computer.

Office equipment.

Tractor.

Furniture and fixtures.

Buildings.

All those things which are utilised in your business and can be touched and seen are known as tangible assets.

Now goodwill.

What is Goodwill?

Fame of the brand name in the market.

You can find the same material but the one with the brand will be more preferable.

So the brand name increases its value.

Different places can have different prices accordingly.

According to the location.

This will be considered in goodwill.

Also you cannot see the goodwill.

Suppose i have a store of my forefathers and that store is working since so many years,

And I have built the customers who keep credit due to trust in me and my business.

So what is this?

Goodwill !

Business trust is a business credit.

Through which there is customer bonding and the customer loyalty increases.

So this is also a goodwill which cannot be seen but is important.

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This is important to run your business.

Getting me?

Suppose a patent.

You must know about corona / covid.

In this, every country was connected to find the vaccine.

Also they wanted to register after they find the vaccine.

Why?

Because anybody can copy that.

Anybody can steal its formula and state that they have made it.

Getting me?

So what do we do in such scenarios?

Straight away We register the idea that we get or any kind of formula that we research.

So this is known as a patent.

We cannot touch this or the formula but it is equally important to the tangible assets.

Intangible and tangible assets are equally important to us.

Like a trademark, software that we were able to develop after the struggle of years.

So we will obviously register the same.

And it will be considered as intangible in our assets.

What would be the need to add any expense in the fixed assets?

Suppose a motor vehicle costs 10 lakh.

And you didn’t categorise it into tangible assets and directly displayed it to a profit and loss account.

As “motor vehicle purchased - 10 lakh”

Then what will happen?

Your Profit will be less than 10 lakh in one year.

Why?

Because you neither made it an asset nor capitalised.

You added it directly to the profit and loss account.

What will happen due to this?

Your profit will go down below 10 lakhs.

 In the second year also.

As you will not purchase it every year.

What will happen in the next year?

Profit will be boosted.

So if we compare, what will we notice?

A year has very less profit and a year has a lot of profit

Which means your business is uneven.

But the actual thing is, your business is not uneven, your profit is displayed wrong because you haven’t done your recordings properly.

Getting me?

So whenever you are purchasing any assets or making any expenses, you need to bifurcate them into revenue and capital.

Otherwise your profit will be displayed improperly.

If you have any queries or comments, click the discussion button below the video and post there. This way, you will be able to connect to fellow learners and discuss the course. Also, Our Team will try to solve your query.

In the next session we will see how the bank reconciliation is done.

Until then thank you